Dog days of August generate slowest week of the year; investors bid on Europe, longer terms

By Emma Trincal

New York, Aug. 14 - As the summer vacation period began in earnest, issuance volume saw its weakest flow for the year last week with $132 million sold in 57 deals, according to data compiled by Prospect News. The tendency to invest in longer-dated maturities and a renewed interest in international equity, in particular European stocks, constituted the main trends.

The best week so far was June 23 with $1.85 billion, or 8.27% of the year-to-date notional. Last week's volume made for only 0.59% of the $22.41 billion sold year to date.

"We're all on vacation," a structurer said.

"It's been extremely slow. Most buyers are not in the office," a sellsider said.

"Besides, other asset classes are getting more attention like munis, for instance, where retail investors are finding more value.

"It's been slow this month, not just in structured notes but across all asset classes. People I've talked to are saying this is one of the quietest Augusts they've seen in a very long time. Hopefully, everybody will come back to work and things will pick up next month."

For the month, or the period comprised between Aug. 1 and Aug. 10, volume rose 2.86% compared to the $288 million priced during the same period of July. However, the first 10 days of last month included the slow Fourth of July week, sources noted. It may be too soon to assess whether August will surpass July in sales, sources said.

"It's just the summer, that's all. There hasn't been that much flow," a market participant said.

"The slowest month for structured notes is actually July, not August.

"It does seem overall that this year, August is a little bit slower than usual."

The structurer said that he disagreed with the notion that July tends to be the slowest month.

"I think August in general is very slow," he said.

"First, Europe is on vacation. Second, here in the U.S., you'll find that this is the last month parents can spend with their children. Parents, families take time off before school starts again.

"I'm not too concerned about last week though. It's one of these weeks. I've been calling a few people last week; everyone was pretty dead in the water. What matters more is what's going to happen next week and the last week of the month. I believe we'll push through. July has been a decent month. It was one of the best months we've seen.

"I'm confident that things will pick up again in September."

Volume year to date is slightly higher, up 1.03% from $22.18 billion last year. The number of offerings is 4,791, pretty stable compared to 5,007 last year, according to the data.

Euro bid

Investors last week continued to express an interest in non-U.S. equities even if the S&P 500 index remains the prevalent underlying.

While notes linked to the S&P 500 accounted for 17.85% of the volume, structures linked to the Euro Stoxx 50 index made for 17.14% of it. The Russell 2000 index accounted for only 7.25%, according to the data.

"People see that Europe might be cheaper. European stocks have lagged the U.S., and so it represents an opportunity," the market participant said.

The largest offering last week was linked to the European equity asset class. It was Goldman Sachs Group, Inc.'s $11.47 million of 0% digital notes due Feb. 10, 2015 linked to the dollar value of the Euro Stoxx 50 index.

The size of last week's top deals was a confirmation of the lackluster volume. There were only two deals in excess of $10 million and none over the $20 million threshold versus 19 deals over $10 million and eight deals in excess of $20 million during the prior week.

Investors in the Goldman offering will receive a digital payout of 9.6% if the final index level closes above 85% of initial index level. Otherwise, they will incur a loss of 1.1765% for every 1% that the index declines beyond 15%.

The second deal offered a large exposure to European stocks via the MSCI EAFE index, which is heavily weighted in this geographic area.

JPMorgan Chase & Co. priced $10.54 million of 0% capped buffered enhanced participation equity notes due Aug. 10, 2015 linked to the MSCI EAFE. The leverage multiple is 1.5, and the cap is 18.3%. There is a 10% buffer on the downside with a 1.11 times leverage factor applied for each point of index loss beyond 10%.

"There's been some talk that European markets are now set to rally off their lows as things have stabilized. After all, this is an index that has been pretty beat up over the last three years. For many, now may be the time to jump into European markets," the structurer said.

"At the end of the day, European stocks will be carried by the bullish performance of the U.S. So people are thinking that maybe they now have a good entry point, maybe they can find something similar but cheaper. The Euro Stoxx fits the bill in that regard. That's why it has become such a popular underlying.

"We're getting more requests for pricing on the Euro Stoxx from clients than we actually go to them to pitch this index.

"This is somehow a new story. Getting exposure to European stocks a year ago would have been less probable."

Longer maturities

Shorter-dated notes, in particular one-year notes, have become less prevalent in volume terms even if many deals in that time horizon continue to be priced, according to the data.

Besides two one-year deals priced by Citigroup Inc. - one autocallable linked to Cummins Inc. for $9.31 million and a $7.5 million product linked to the Dow Jones - UBS Commodity Index Total Return 4 Month Forward - the overwhelming majority of one-year notes were in the $300,000 size and under, the data showed.

"We've seen a small pickup in interest rates but still not enough to make one-year tenors attractive. It's mostly long-term yields that have been rising," the structurer said.

He said that the two-year swaps were trading in July at around 47 basis points to 50 bps per annum, "around the same level" as now, but that in May the rate was in the low 30's.

"Let's just say to illustrate the point short-term rates have been roughly moving up 20 basis points since the beginning of the summer. On a one-year structure, it gives you 20 basis points. You get 40 basis points on a two-year. You start getting more value the longer you go out. The longer-dated products start to look much better as you have more to play with. The one-year doesn't give you much. What can you do toward the options with 20 basis points? It doesn't give you that much juice," this structurer said.

"You would need rates to move significantly higher to improve the terms on a one-year.

"On top of that, volatility levels are still low.

"If a client wants a one-year, you show them a one-year and they're disappointed. They want to see more options. They realize that they can get more value with longer maturities whether it's a larger cap, no cap, more downside protection or more leverage.

"As much as investors would like to stick to one-year, 14-month deals, they realize that they're better off going further out a bit because ultimately what they're looking for is more value. They want more upside with the best downside protection."

In general, the larger bid for longer-dated notes is a positive sign, this structurer said.

"It shows that people are more bullish and that they have the confidence to go further out," he added.

"And let's be realistic, this trend also suggests a lot more faith in the issuer. While we've seen how banks have been deeply hurt by the financial crisis, we now have reports about how well the banking industry is doing, how pretty solid banks have become and how strong their capital ratios are.

"All those factors combined make people more comfortable going longer."

The top agent last week was Goldman Sachs, which priced six offering totaling $38 million, or 28.92% of the volume. It was followed by Barclays and JPMorgan.

"It does seem overall that this year, August is a little bit slower than usual." - A market participant

"You would need rates to move significantly higher to improve the terms on a one-year [note]." - A structurer

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